Really Good: Introduction to Power Laws- via Intrepid Insights – Here’s a really good primer on the Power Law phenomenon. As you can see, this manifests itself in the real world much more often than the so-called “normal” distribution:

The Economics of Superstars- via Rosen – The phenomenon of Superstars, wherein relatively small numbers of people earn enormous amounts of money and dominate the activities in which they engage, seems to be increasingly important in the modern world. While some may argue that it is all an illusion of world inflation, its currency may be signaling a deeper issue.’ Realizing that world inflation may command the title, if not the content of this paper, quickly to the scrap heap, I have found no better term to describe the phenomenon. In certain hnds of economic activity there is concentration of output among a few individuals, marked skewness in the associated distributions of income and very large rewards at the top.

Missing the Trees for the Forest: - NYU, Princeton, & Rice – via These findings suggest a novel factor that might contribute to such diverse social-cognitive shortcomings as stereotyping, egocentrism, and the planning fallacy, where people adopt abstract representations of concepts that should be represented concretely.What have academics added to asset Management? - via SSRN – In this, the fourth article in the economists’ hubris paper series we look at the contributions of academic thought to the field of asset management. We find that while the theoretical aspects of the modern portfolio theory are valuable they offer little insight into how the asset management industry actually operates, how its executives are compensated, and how their performances are measured. We find that very few, if any, portfolio managers look for the efficiency frontier in their asset allocation processes, mainly because it is almost impossible to locate in reality, and base their decisions on a combination of gut feelings and analyst recommendations

Observation Inflation: When Your Actions Become Mine - via Psych Science – Imagining performing an action can induce false memories of having actually performed it—this is referred to as the imagination-inflation effect. Drawing on research suggesting that action observation—like imagination—involves action simulation, and thus creates matching motor representations in observers, we examined whether false memories of self-performance can also result from merely observing another person’s actions. In three experiments, participants observed actions, some of which they had not performed earlier, and took a source-memory test. Action observation robustly produced false memories of self-performance relative to control conditions. The demonstration of this effect, which we refer to as observation inflation, reveals a previously unknown source of false memories that is ubiquitous in everyday life. The effect persisted despite warnings or instructions to focus on self-performance cues given immediately before the test, and despite elimination of sensory overlap between performance and observation. The findings are not easily reconciled with a source-monitoring account but appear to fit an account invoking interpersonal motor simulation.

Taxes & The Billion-Dollar Shack - via NYT – In a ferocious tropical heat, I stood a few feet from the front door of the building — a shack, really — that some say brought Russia to its knees and destroyed it as a modern nation. There is no plaque commemorating this achievement, and I may have been the first to make this pilgrimage. After all, there are only two flights a week out of Brisbane, Australia, that will even take you here — here being the nation of Nauru, a tiny island 1,200 miles east of New Guinea in the Pacific Ocean, just south of the Equator. It may be about as far away from everywhere as you can get and still be somewhere.

Ovulating Women Unconsciously Buy Sexier Clothing to Outdo Attractive Women – Via ScienceDaily — Ovulating women unconsciously buy sexier clothes, says new research from the University of Minnesota’s Carlson School of Management. The study finds that ovulating women unconsciously dress to impress — doing so not to impress men, but to outdo rival women during the handful of days each month when they are ovulating.Is the UK a confused nation crippled by choice – via PhysOrg – The UK is a nation overwhelmed by too much choice and information according to a study based on the views of 6,000 people, revealing that modern life has created a generation of people incapable of making decisions.

Miguel’s Weekly Favorites

Arrogant Professionals- via Overcoming Bias – “We study a unique panel of over 11,600 probability distributions provided by top financial executives and spanning nearly a decade of stock market expectations. Our results show that financial executives are severely miscalibrated: realized market returns are within the executives’ 80% confidence intervals only 33% of the time. We show that miscalibration improves following poor market performance periods because forecasters extrapolate past returns when forming their lower forecast bound (”worst case scenario”), while they do not update the upper bound (”best case scenario”) as much. Finally, we link stock market miscalibration to miscalibration about own-firm project forecasts and increased corporate investment.” (more)

Understanding: Consistency + Commitment - via Brooks Bell – So first – hazing. How does this apply to the marketing concept of commitment and consistency? Cialdini does a great job linking hazing to tribal initiation rites with the initiates going through the same type of tribulations: beatings, exposure to cold, thirst, punishment, threats of death, and– my personal favorite– the eating of unsavory foods. The important part for marketers comes AFTER the hazing– the initiates actually value the membership to the group MORE because of how they had to struggle to get into it. In other words, once the initiate overcame the difficult hurdles to get into the group, their commitment to the group was heightened. Struggle + Commitment = Loyalty. Consistency comes in to play here as well– once the initiate has made a decision about how great the group is they just joined, they will have a tendency to act in a manner that supports their commitment.

Dopamine Determines Impulsive Behavior - via Sciam- Brain scans illuminate the internal connection among the neurotransmitter, impulsiveness and addiction-”Individuals vary widely in their capacity to deliberate on the potential consequences of their choices before they act,” note the authors of a new study on the impulsive tendency. “Highly impulsive people frequently make rash, destructive decisions.”

A Field Guide To Narcissism – via Psych Today – There’s the groom who wouldn’t let his fiancée’s overweight friend be a bridesmaid because he didn’t want her near him in the wedding pictures. The entrepreneur who launched a meeting for new employees by explaining that nobody ever gets anywhere working for someone else. The woman who had such confidence in her great taste, she routinely redecorated her daughter’s home without asking. The guy who found himself so handsome, he took a self-portrait with a Polaroid every night before bed to preserve the moment.

Low- and high-end fashion products & signaling conspiracies - via overcoming Bias – Low- and high-end fashion products tend to have less conspicuous brand markers than midprice goods, according to a paper soon to be published in The Journal of Consumer Research. Rather than rely on obvious logos, expensive products use more discreet markers, such as distinctive design or detailing. High-end consumers prefer markers of status that are not decipherable by the mainstream. These signal group identity only to others with the connoisseurship to recognize their insider standing.

A Judge’s Guide To Neuroscience - via Sage -It is part of the human condition to think about how we think and to attach consequences to our conclusions. In law, for example, whether a person goes to prison (and for how long), and whether a person is liable for damages (and for how much), are the product not only of what action the person took but also of what the person’s state of mind was when he or she so acted. Yet few of us are very good mind-readers, and the law has struggled both to define relevant states of mind and to devise ways of perceiving them.

Have less, give more - via Boston- According to a team of psychologists, the lower classes are a cut above. Given the opportunity to share money with an anonymous person, people who considered themselves lower in socioeconomic status shared more. When asked how much of one’s salary should be donated to charity, they designated a higher percentage. And, when confronted with a distressed person in need, they offered more help. These differences don’t seem to be innate. For example, after simply asking people to contemplate their socioeconomic status relative to those with higher socioeconomic status, people became more charitable. The authors theorize that people in the lower strata of society are particularly motivated by a greater dependence on — and, thus, concern for — social relationships, though affluent individuals may be more inclined to abstract charity (e.g., the environment).How To: Turning pages into data - via Stat Modeling – There is a lot of data on the web, meant to be looked at by people, but how do you turn it into a spreadsheet people could actually analyze statistically? The technique to turn web pages intended for people into structured data sets intended for computers is called “screen scraping.” It has just been made easier with a wiki/community http://scraperwiki.com/.

How much of who you choose to date is determined by your preferences vs “market conditions”? - via bakadesuyo – The role of individual preferences, however, is outplayed by that of opportunities. Along some attributes (such as occupation, height and smoking) opportunities explain almost all the estimated variation in demand. Along other attributes (such as age), the role of preferences is more substantial, but never dominant.Emotional or Sexual Infidelity? If you have to pick one…. – via Social Psych Eye – Which is worse, your partner being sexually or emotionally unfaithful? For most people either an emotional or sexual affair can inspire feelings of anger or jealousy. However, “Sugarbabe” author Holly Hill argues that, for men, cheating is normal and thus women should accept that their partner will probably cheat on them. She says, however, that women can regain control by allowing their partners to cheat but controlling the circumstances. According to her, by creating rules about your partner cheating you can structure their infidelity and dissuade them from keeping their affairs secret. In particular, Hill seems to suggest that it is emotional affairs which hurt, and by allowing sexual infidelity she keeps her partner from having an emotional relationship with someone else. For example she says that in her relationship, her boyfriend is allowed to have sex with other women but not sleep over or go on “romantic weekends”.

When Even The Illusion Of Progress Is Motivating - via What Makes Them Click – The goal-gradient effect says that you will accelerate your behavior as you progress closer to your goal. The scenarios I describe above were part of a research study by Ran Kivetz, Oleg Urminsky, and Yuhuang Zheng (full reference is below). They decided to see if humans would behave like the rats. And the answer is, yes they do.

Studying imperfect rationality- via Do It Yourself Scholar – Much of economic theory is based on the idea that humans are rational actors who carefully calculate the pros and cons of each decision. But what gets left out such a world view? UCLA Public Policy Professor Mark Kleiman attempts to fill in the blanks in his course Imperfect Rationality (feed).

Are self-reflective people more depressed? - via Deric Bownds – I’ve repeatedly heard in psychology seminars the truism that introspection (versus extroversion) correlates with depression. Grossmann and Kross, in their comparison of University of Michigan and Moscow State University students, show that this depends very much on culture. Gilbert Chin does a nice summary in the July 30 Science Magazine (picture credit: Vassilij Grivorovi Perov):

Paul Rozin on what psychologists should study- via Culture & Cognition – A related point is that psychologists may now be too bent on minute investigations of mechanisms, again as opposed to making sure that these mechanisms fit within the larger picture of the known phenomena. Sometimes a phenomenon that is only reported in a few (or even a single) studies will give rise to many publications trying to elucidate the precise mechanisms that give rise to it. This is often done without pausing for a second and wondering of the original phenomenon is robust—if it occurs across a reasonable variety of situations—or if it is not part of a larger phenomenon—in which case studying the details of a particular situation is unlikely to yield a deep understanding of the mechanisms.Women Are More Attracted to Men Wearing Red - via Discovery -The Lady in Red” is famous in movies, books and music, but men in red turn out to be just as alluring, according to a new study that found men who wear red are more attractive and sexually desirable to women.

Video: Science Shows Superstitions Actually Work! Sort of - via PsychFiles – Okay, admit it – you have some kind of lucky charm on you, in your car or in your house. And if you participate in any sport or performance activity you have some sort of ritual that you believe will help make you more successful. Well guess what – there is research to show that such charms and rituals really do help you perform better. Find out how in this episode of The Psych Files.

Don’t Go Grocery Shopping When Hungry!- via One of the relevant studies that I cite in my two books constitutes the topic of today’s post. It is an “oldie but goodie” study published in 1969 that explored the link between situational hunger and grocery purchases. Richard E. Nisbett and David E. Kanouse tracked the grocery bills of “normal weight” individuals (n = 134) as well as their overweight counterparts (n = 149), and linked these to shoppers’ levels of food deprivation (i.e., a proxy measure of situational hunger). I would have thought that both groups would display a positive relationship between situational hunger and grocery bill (an instantiation of the deficit hypothesis for food hoarding), with the relationship being stronger for the overweight consumers. This is not what was found, at least not for the overweight shoppers.

Hard Drinkers, Meet Soft Science - via Neuroanthroplogy – Of the 23 million people who struggle with alcohol or drug abuse on a yearly basis, roughly 1.2 million regularly attend Alcoholics Anonymous (AA) meetings as a way to stop drinking. AA was the first 12-step program to be created. Founded on December 14, 1934 by Bill Wilson and Robert or “Dr. Bob” Smith, AA combines self-assessment, reconciliation, group therapy, and surrendering control to a “higher power” in a progressive plan consisting of 12 distinct steps to combat impulsive cravings to use.

From Cockpit to Concert Hall: Distributed Cognition- via Everyday Sociology – Edwin Hutchins, a professor and researcher in the field of cognitive science, has conducted extensive research about distributed cognition. Distributed cognition means that an individual’s understanding of and actions in the world are not merely a product of that one person’s individual decisions or desires, but are influenced by non-human agents.

Tatonnement: Groping for Stock Equilibrium- via Psy-Fi Blog – One of the oldest saws in the book of economics is the idea of supply and demand; it even pre-dates Adam Smith, with a legacy stretching back to Muslim thinkers of the eleventh century. If people demand the Pet Rock as the next must-have toy but supply is limited then prices of Pet Rocks will go up. If some enterprising rock counterfeiter then floods the market with a supply of good-enough fakes then the demand is likely to fall, and price with it.

The spectacles through which I see the race and IQ debate- via Flynn- The ranking of Wechsler subtests in terms of their g loadings is equivalent to ranking them in terms of the cognitive complexity of the tasks measured. Lower performing groups do not always fall behind higher performing groups the more complex the task. But that is the general rule, no matter whether the cause of the lower performance is genetic or environmental. Complex tasks tend to be more affected by genetic differences in inherited traits, have higher heritability, and be more sensitive to inbreeding depression. Therefore, the method of correlated vectors sheds no light on the race and IQ debate. It is irrelevant that black/white score differences on Wechsler subtests rise as their g loading, heritability, and inbreeding sensitivity rise.

Humans Imitate Aspects of Speech We See- via ScienceDaily — Humans are incessant imitators. We unintentionally imitate subtle aspects of each other’s mannerisms, postures and facial expressions. We also imitate each other’s speech patterns, including inflections, talking speed and speaking style. Sometimes, we even take on the foreign accent of the person to whom we’re talking, leading to embarrassing consequences.

What Really Happened: Stealing Mona Lisa – via Vanity Fair – The shocking theft of the Mona Lisa, in August 1911, appeared to have been solved 28 months later, when the painting was recovered. In an excerpt from their new book, the authors suggest that the audacious heist concealed a perfect—and far more lucrative—crime.

Financial Topics & Investing

How to Survive in Vegas - via Business Week – Gary Loveman left a Harvard Business School professorship to join Harrah’s Entertainment. By putting his theories about customer service into practice, he built the world’s biggest gaming company. Then came the crash

Billion-Dollar Underdogs - via Miller McCune – Americans love the underdog whether it’s in sports, in history or political campaigns — and in the brands they buy.That’s right, Samuel Adams beer, Ben and Jerry’s and Google — at least the old Google — all belong right up there with the Alamo, David, and Lance Armstrong … well, the Lance we hoped wasn’t juiced.

The world’s least expensive cities in 2010 – via La Times – Get more out of your dollar with a vacation to one of these atypical travel destinations. These cities were ranked as the least expensive in the world by the 2010 Mercer Cost of Living Survey, released in June.

Video: Wilbur Ross on Charlie Rose- via CRVideo: Ken Rogoff on Charlie Rose- via CRDan Loeb: You’re Boring Me- via II -In July, he posted a 3.2 percent return in his $1.86 billion Third Point Offshore Fund, Ltd., boosting his 2010 return to 13.7 percent. Not many other hedge fund managers can make this claim. And, yes, he shrewdly racked up gains from two auto-related companies — Delphi and Chrysler — a natural gas company, and some short position whose name he would not divulge to investors. But, this is boring stuff.

Academic Research Worth Reading

Eliciting Risk and Time Preferences - via Geary Behavior Center – We conducted experiments in Vietnamese villages to determine the predictors of risk and time preferences. In villages with higher mean income, people are less loss-averse and more patient. Household income is correlated with patience but not with risk. We expand measurements of risk and time preferences beyond expected utility and exponential discounting, replacing those models with prospect theory and a three-parameter hyperbolic discounting model. Comparable risk parameter estimates have been found for Chinese farmers, using our method. (C83, D12, O12, P38)